Summary: In this article you’ll learn more about how to become an accredited investor, as well as the ins and outs of real estate syndications. After finishing the second part of this series, you will ultimately discover if you want to add real estate syndications to your investment portfolio. You might also discover that syndications might be the right choice for a future investment expansion; alternatively, they might not be right for you at this time. No matter the decision, all of your questions and concerns will be answered along the way. This article is based on a RealWealth webinar hosted by our Co-Founder and CEO Kathy Fettke and our syndication team.
- What is a Real Estate Syndication (Recap)?
- Can I Participate in a Real Estate Syndication?
- How Do Regulation D Rule 506 Exemptions Work?
- Understanding a Private Placement Memorandum (PPM)
- Review Operating Agreement or LLC Operating Agreement
- Filling Out a Subscription Agreement
- How Do I Join a Syndication Project?
Part 1 of our Ultimate Guide to Syndications for Real Estate Investors was designed to help you better understand the various types of syndications, how they are structured, as well as the pros and cons involved. By acquiring the latter knowledge, you can ensure that you ask the right questions and that you are partnering with an experienced developer or team of real estate professionals who will minimize risks, while simultaneously maximizing profits. In this second part of the series, we want to take a more in depth look at some of the nuances associated with real estate syndications.
What is a Real Estate Syndication (Recap)?
A real estate syndication is a group investment whereby investors come together to pool their resources. Through these pooled resources they can invest in larger commercial or residential real estate deals. They can also determine via a real estate LLC operating agreement, if they want to invest in large properties via an LLC with other partners. In this vein, there are various types of syndications, including entitlement deals, land development, diversified Single Family Fund (SFR), and any large real estate deals. However, as was discussed in Part 1 of this series, the two most common types of syndications are entitlement deals and a diversified Single Family Fund (SFR). Regardless of the type of syndication, the most important thing that you can remember is to choose a project that is managed by a highly qualified individual or group.
Can I Participate in a Real Estate Syndication?
If you want to know how to participate in a real estate syndication, then you must first answer the question, how can I become an accredited investor.” Fortunately, answering this question is made easier when you determine if you meet a few critical financial criteria.
How Can I Become an Accredited Investor?
Becoming an accredited investor will require you to explore your current and predicted financial status. In fact, accredited investors must meet the following types of criteria in order to be considered for many syndication opportunities:
- A net worth in excess of $1 Million; or
- $200K yearly income ($300K for a couple); and
- The ability to provide 3rd party verification of status.
Accredited Investors vs. Non-Accredited / Sophisticated Investors
A sophisticated investor is an individual who is deemed to have the sufficient investing experience, as well as the knowledge needed to effectively weigh the risks and potential merits of an investment opportunity. This type of person is defined within the RealWealth as meeting the following criteria:
- Annual income of more than $150K for an individual for each of the last two years;
- Annual income of more than $200K for a married couple for each of the last two years; and / or
- A net worth of over $250K excluding your primary residence.
How Do Regulation D Rule 506 Exemptions Work?
It is important to note that some projects are only available to Accredited Investors, while others are open to both Accredited & Non-accredited / Sophisticated Investors. As was discussed at length in Part 1, it’s very important to understand how the project you are investing in is structured. With this in mind, if you want to understand if the regulation d rule 506 is applicable, then you need to ensure that you have thoroughly examined the project’s operating agreement, as well as the PPM. These two documents will explain who controls what, and what type of investors the project is open to.
Under a Rule 506c, the project is only open to Accredited Investors and must provide third party verification of this status. We can discuss this type of project openly with non RealWealth members.
Under a rule 506 b, the project is open to Accredited and 35 Sophisticated Investors. With this in mind, we can only discuss the project details with investors that we have a relationship with and who we know have the financial potential to invest in the project.
Understanding a Private Placement Memorandum (PPM)
A Private Placement Memorandum (PPM) is a document that describes in detail what the investment is, how it will be executed, and who can invest in the project. This document is also where you will find any of the legal disclosures regarding the identified potential risks that are associated with the syndication. It is important to note that investors do not execute the PPM; however, they will be required to execute a Subscription Agreement which states that they received the PPM and any of the related documents.
Generally speaking, a PPM is made up of the following parts:
- An executive summary with the pertinent terms of the investment;
- Company objectives, structure, and governance
- Details regarding who can invest;
- Sources and uses of proceeds;
- Distributions of cash, profits, and losses to members; and
- The Role of the manager as well as any compensation.
Review Operating Agreement or LLC Operating Agreement
The operating agreement, also known as the real estate LLC operating agreement is a legal document that establishes the business (i.e. syndication), sets forth the business relationship between the various parties, and governs how the business will operate. This document is signed by all members and partners.
Filling Out a Subscription Agreement
If you want to join a syndication, then you will need to fill out a subscription agreement. The subscription agreement is basically an application by an investor to join a syndication. All prospective investors will need to be reviewed and approved by the managing member before they can proceed with any of the next steps.
Before Getting Started…
Before you decide to join a syndication, or to fill out a subscription agreement, you should first answer the following questions.
- Do You Qualify for this Project?
- How Do You Want to Hold Your Units?
- How to Fill Out Paperwork?
How Do I Join a Syndication Project?
As discussed in Part 1, there are several steps that must be completed before you can join a syndication. To recap these steps, remember that you must first:
- Review all offering documents. Consult with your attorney and CPA regarding the offering documents.
- Decide how you want to hold your investment.
- Fill out your subscription agreement in accordance with how you want to hold the investment.
- Upload your paperwork to the secure RealWealth investor page that is associated with the syndication project.
- Be on the lookout for a confirmation email / message from someone within the RealWealth syndication department within 48 hours of submitting your documents. This confirmation will either let you know that you are approved, missing paperwork, or do not meet the necessary requirements.
No matter whether you are just beginning to explore real estate syndications or want to join one today, it is important that you have a complete understanding of the various types of syndications, how they are structured, as well as the pros and cons involved. The latter knowledge will allow you to ask the right questions and effectively determine if investing in real estate syndication projects will help you achieve your financial goals and objectives.